Business Context and Reporting Period
PG&E Corporation is a California holding company whose primary operating subsidiary is Pacific Gas and Electric Company, a regulated electric and natural gas utility serving northern and central California. The combined Form 10-Q covers the three months ended March 31, 2015 and was filed April 29, 2015. Results are primarily driven by the Utility and are regulated mainly by the CPUC and FERC.
Key Financial Metrics
| PG&E Corporation consolidated | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Operating revenues | $3,899 million | $3,891 million | +$8 million |
| Operating income | $71 million | $484 million | -$413 million |
| Income before taxes | $(59) million | $321 million | -$380 million |
| Net income | $34 million | $230 million | -$196 million |
| Income available to common shareholders | $31 million | $227 million | -$196 million |
| Diluted EPS | $0.06 | $0.49 | -$0.43 |
| Operating cash flow | $1,080 million | $771 million | +$309 million |
| Capital expenditures | $1,191 million | $1,197 million | -$6 million |
PG&E Corporation’s operating margin declined to approximately 1.8% from 12.4% in the prior-year quarter. The filing does not present a separate consolidated EBITDA measure.
| Balance sheet and liquidity | March 31, 2015 | December 31, 2014 |
|---|---|---|
| Cash and cash equivalents | $145 million | $151 million |
| Restricted cash | $298 million | $298 million |
| Short-term borrowings | $856 million | $633 million |
| Long-term debt | $15,051 million | $15,050 million |
| Total assets | $60,547 million | $60,127 million |
| Total equity | $15,955 million | $16,000 million |
At March 31, 2015, total revolving credit facility capacity was $3.3 billion, with $2.711 billion available after letters of credit and commercial paper. PG&E Corporation had $300 million available and the Utility had approximately $2.4 billion available. Both entities were in compliance with their credit covenants.
Material Changes Versus the Prior Comparable Period
- Revenue was broadly stable, but operating and maintenance expense increased $624 million for PG&E Corporation, primarily because of charges related to the CPUC’s San Bruno-related Penalty Decision.
- The Utility recorded $553 million of Q1 charges: a $400 million customer bill credit, a $100 million increase in the state-fine accrual, and $53 million of estimated disallowed pipeline-safety capital spending.
- Depreciation, amortization, and decommissioning expense increased $93 million, or 17%, due mainly to higher depreciation rates and increased capital additions.
- Electricity costs declined $210 million and natural gas costs declined $86 million, reflecting lower purchased-power volumes, greater Diablo Canyon generation, and lower natural gas prices.
- Operating cash flow increased to $1.080 billion from $771 million, helped by higher base-revenue collections, lower purchased-power costs, and favorable regulatory-account movements.
- Investing cash use increased to $1.272 billion from $1.189 billion, while financing cash provided declined to $186 million from $230 million.
- PG&E Corporation issued 3.6 million common shares during the quarter for $151 million of proceeds and contributed $100 million of equity to the Utility. The company expects continued equity issuance, which would dilute EPS.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- San Bruno Penalty Decision: The CPUC imposed total penalties and remedies of $1.6 billion, funded by shareholders. At March 31, 2015, cumulative recorded charges were $773 million, with anticipated future financial impact of approximately $827 million.
- The future amount includes $636 million of additional disallowed pipeline-safety capital, $161 million of disallowed revenue for pipeline-safety expenses, and approximately $30 million of additional remedial costs. The ultimate amount may change depending on which costs qualify under the CPUC’s requirements.
- The Utility expects to pay the $300 million state fine during 2015 and provide the $400 million customer bill credit in 2016. The filing states that future pipeline-safety spending may not be recoverable through rates.
- Management forecasts approximately $5.5 billion of Utility capital expenditures in 2015 and $5.3 billion to $5.8 billion in 2016. PG&E Corporation forecasts $700 million to $800 million of common-stock issuance in 2015, primarily to fund Utility equity contributions and unrecovered costs.
- The 2015 gas transmission and storage rate case was pending. The Utility requested a 2015 revenue requirement of $1.29 billion, or $555 million above authorized amounts, but the CPUC’s decision was expected in August 2015 and could disallow up to five months of any increase because of improper ex parte communications.
- A federal criminal indictment remains pending against the Utility involving 28 counts related to pipeline-safety standards and alleged obstruction of the NTSB investigation. The maximum statutory fines total $14 million, while the alternative fine alleged could be approximately $1.13 billion. No criminal-fine accrual was recorded because such amounts were not considered probable.
- Additional CPUC, SED, federal, and state investigations could result in fines, operational remedies, revenue disallowances, or unrecoverable costs. The filing does not provide a clear estimate of potential charges for several of these matters.
- Environmental remediation liabilities totaled $965 million at March 31, 2015, of which the Utility expected to recover $677 million through ratemaking mechanisms. Undiscounted environmental costs could increase to as much as $1.8 billion under adverse assumptions.
- PG&E Corporation and the Utility reported low earnings-to-fixed-charges ratios for the quarter: 0.75 for PG&E Corporation and 0.65 for the Utility. The Utility’s ratio including preferred dividends was 0.64.
- The filing describes no material changes in risk-management activities. Commodity derivatives are used for hedging and related costs are generally intended to be recovered through customer rates.
- Subsequent to quarter-end, on April 27, 2015, both revolving credit facilities were amended and extended to April 27, 2020, with revised letter-of-credit and swingline sublimits.
Most Important Facts for Investors to Verify
- Final CPUC treatment of the $850 million shareholder-funded pipeline-safety obligation and whether additional disallowances or charges arise.
- Timing and outcome of the 2015 gas transmission and storage rate case, including any five-month revenue disallowance and the amount of authorized revenue recovery.
- Cash timing for the $300 million state fine, the $400 million customer credit, and future safety-related expenditures.
- Progress and potential outcomes of the federal criminal case and remaining CPUC, SED, federal, and state investigations.
- Actual versus forecast capital expenditures, unrecovered pipeline-related costs, and the resulting need for equity issuance and EPS dilution.
- PG&E Corporation’s liquidity, access to capital markets, credit ratings, and compliance with the 65% debt-to-capitalization covenant.
- Changes in environmental remediation estimates, particularly for the Hinkley and Topock sites, and the portion recoverable through rates.